January CPI: Inflation Slows, Real Wages Up.

It's a welcomely benign inflation report, though some pressures in food and electricity persist. The Fed was right to pause for now.

The Consumer Price Index began the year with a monthly rise of 0.2% and a yearly increase of 2.4%, the lowest yearly rate since May of last year (before tariffs started to bite) and slightly below expectations. The comparable numbers for core CPI (ex energy, food) were 0.3% and 2.5%, the latter being the lowest reading on yearly core since March of ‘21, right before inflation took off.

As you’ll see, there’s a concern or two under the hood, but that’s almost always the case. Also, some shutdown hangover measurement problems persist, probably imparting a bit of downward bias.

But generally speaking, it’s a good inflation report, one that in tandem with the better-than-expected jobs numbers, should confirm the Fed’s wisdom in pausing their rate-cut campaign. At least for now, inflation, while still elevated (again, a bit more so than these numbers suggest), appears to be in a pretty good place. Given employers’ hiring strike (Jan payrolls not withstanding), I can’t say the same thing about the labor market, which is too unwelcoming to new entrants and job seekers. But the jobless rate has legit ticked down over the past two months, so there’s some good news there too.

A few hot spots:

—From the affordability space, grocery (“food at home”) and, even more so, electricity prices are well above comfort levels (the latter ticked down for the month by 0.1% but is up >6%, yr/yr). Pre-pandemic, grocery inflation was around zero, now it’s around 2%. That’s a big difference that people are feeling at the checkout lines.

—Re electricity, our SIEPR team recently wrote that “higher wholesale power costs, investment to replace aging grid infrastructure, extreme weather events, state policies such as net-metered solar and renewable energy standards, and rising demand from data centers and electric vehicles have all contributed to higher prices.” It’s not just data-centers, but they’re in the mix.

—Nat gas that folks have piped in to their homes and apartments has also been spiking, up almost 10% yr/yr.

—Groceries have been pressured by tariffs, as well as drought, input costs, and insufficient upstream competition in parts of the industry.

—Airfares were up 6.5% in January, a strong pop probably reflecting strong demand, some operating cost pressures, and weather-related stressors.

—Core services ex-housing is a category I worry about, as it’s been high and sticky for awhile, and it arguably doesn’t have that much to do with tariffs. It’s drifting down slowly, which is good news, but still elevated relative to pre-pandemic.

A few cooler spots:

—Used car prices were down 0.9 and 1.8 percent in Dec and Jan; they’re down 2% yr/yr, reflecting their buff inventory.

—Energy prices fell, led by retail gas, down 3.2% for the month and 7.5%, yr/yr.

—Core goods, a category wherein tariffs hit, have been flat for two months, up 1.1%% yr/yr. This could reflect the Fed’s frequent point that tariffs should be a one-time hit to inflation, lastingly raising the price level, not the inflation rate. OTOH, the Orange Menace continues to toss them around, so we’re not out of these woods yet. Also, as noted, used-car prices are way down; core goods ex autos is still placing upward pressure on prices, as Ernie shows here.

—The heavily weighted housing index has been coming down nicely. Below, I show the 6-month annualized changes for rent or owners’ equivalent rent, which look like they’re back to pre-pandemic growth rates. This is good news for the inflation rate, but it doesn’t relieve the affordable housing shortage. Half of renters still pay at least 30% of their income on rent, a serious living-standard burden, and slower inflation on its own won’t change that. We need more supply.

—Real earnings were up a solid 1.3%, year-over-year, a clip that should help boost spending going forward.

Finally, there’s a bit of pall hanging over these numbers. Recall that the shutdown led to missing CPI data for October. The BLS decided to plug in zero price growth for most basket items for the month, which imparts a downward bias that’s still in the data. Mark Zandi’s team carefully estimated this bias to be in the neighborhood of 3-tenths, suggesting CPI inflation is still coming in well above target.

That said, if broad inflation pressures were building, we’d see that in the data, and, as of now, we do not. There’s still more pressures than we’d like in some consumer-sensitive areas, people are still struggling with affordability constraints around key components of their family budgets, but January jobs and inflation-adjusted wages are up, and that’s good news.

Note: I found it interesting and hopeful that today’s Axios featured a story today that was right out of my “resistance is anything but futile” take from yesterday.